I remember when I first got into this business over 10 years ago and one of my partners told me that the secret to success is about the people, not about the technology. All too often we are enamored with how cool or sexy a technology is, invest lots of dollars to create that killer product, and sometimes forget that it is all about the people. We spend lots of time on product development plans, sales plans, and financial models and not enough time preparing and thinking about how to continue to motivate and inspire your team. When your assets go up and down the elevator everyday you must constantly remind yourself that you need to care for that asset if you ever want to have that killer product. The end of the year is always a great time to reassess and plan for the next one. As I spent the week before the holidays on a few compensation committee calls, I thought I would share with you some of my philosophy on compensation and how to take care of that ever precious asset, your employees.

From a philosophical point of view, I view compensation as the combination of salary, bonus (if any), and equity. For cash starved startups, having management and employees believing in the opportunity and team and being motivated by equity is key to success. From a cash perspective, you have to pay market to slightly above market rates to attract good people, but I prefer to see the employees with above market equity compensation packages to align interests. You never want anyone worrying about paying their mortgage but at the same time, given similar backgrounds, I prefer the employee who will take less cash and a higher equity package.

The next question you may have is what is the definition of market. On a public company board, for example, I look at other companies that we compete with and other businesses that are in a similar stage of revenue growth and financial numbers. On a private company board, there are surveys out there that you can get a hold of that outline compensation for different positions based on venture capital raised, geography, stage of company, and revenue. None of these numbers are scientific but they certainly help you ballpark market compensation. Of course, any active venture capitalist can look into their existing portfolio of companies to determine what market really is. Taken together, you must decide if you want to pay market, below market, or above market compensation. As I mention above, I like to pay above market on equity and at market or slightly above market on cash compensation. Of course, there are certain cases where you have to be flexible and pay up for the right person.

In terms of bonuses, I am not a huge fan of cash bonuses for companies losing money, especially in the early stages of development. As a company matures and hires additional executive talent cash bonuses become more important to retain top level executives. With respect to bonuses, there are no guaranteed bonuses, only performance-based ones. In addition, I prefer a performance-based bonus over just paying an executive more salary. As far as bonuses are concerned, it is really important to have clearly defined goals and metrics to measure performance and subsequently pay out cash. For most of the key management, I like to tie much of the bonus number 70-100% (depending on which function) to overall company numbers like revenue goals, number of new customers signed, and cash balance related numbers. These metrics should be simple Yes/No metrics - it should be quite clear if someone realized their goal or not. Of course, these metrics depend on the stage of company and predictability of the future, but overall it is good to see all of management working together as a team, succeeding or failing together on overall company goals versus measuring performance against individual MBOs. Of course, this means having a clearly defined budget that is put together and agreed to by all stakeholders including management and the board. This must be put in place by the end of the prior year so you are ready to measure and manage performance for the new year.

As I look to the new year, it is important to have an option forecast just like any financial forecast. In order to do so, you should have a general range of options that you will give to each employee based on their level such as staff, manager, director, VP, etc. so that each employee at each level is relatively the same. The range is to obviously give a little more or less to a certain level employee based on performance and other factors. From a company perspective, you then look at your hiring needs for the year, put in the number of estimated options for each employee, and you have just created your option forecast for the year. These compensation bands are important as your employees talk to each other, and whether you like it or not, employees end up knowing how much each person makes and what their equity package is. In fact, I have seen several instances of VPs asking for salaries and bonuses similar to their peers out of respect. This is obviously how I do not want to compensate employees as each function adds a different level of value and each VP starts out at a different time in a company's life. That being said, it usually becomes an issue at some point in time so it is imperative to have a total compensation range for each level of employee and to avoid paying someone total compensation that is completely out of range and non-market.

This is just a general framework, and there will always be one-off adjustments to be made. For example, throughout the year I like management to let us know of any "at-risk" employees that may need some adjustment to their overall compensation numbers. In addition, we also need to know about which employees we should be proactive about and move their compensation to the higher end of a salary range to further incent them. Finally, I like to know about any key performers or herculean efforts that should be rewarded with some additional performance-based options. If you can take care of all of these issues in one fell swoop at the end of the year that is best from a governance perspective. However, depending on the situation, you may have to act swiftly as circumstances can force you to do otherwise.

Finally, and most importantly, there is more to making your people happy beyond the monetary compensation. As I wrote in an earlier post, A Players like to work with other A Players. To the extent that you have a strong team and every hire is better than the next, I can guarantee that you will attract some great talent. A Players like to learn from other A Players and like to know that when their backs are against the wall, they have other team members with the experience and know-how to persevere. In an employee's mind, the more A Players means the more likely that the company will succeed and create some real equity value. In addition, people like to work on exciting projects in a dynamic, lively atmosphere. There is a big difference working in an environment with team members who are passionate about the product and success of the company versus employees who are happy to go through the motions.

The bottom line is that you have to take care of your number one asset, your team, and start preparing early in the year to make sure that you have the right plan in place to keep your team motivated and excited to work at your company. This includes managing compensation proactively but also making sure you hire the right people and create a winning, passionate atmosphere in which your team can thrive.

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Interesting thoughts, Ed. I’m someone coming from the other side — the employees — doing contract work for small, newish tech companies in downtown NYC. People like me who choose to work in this realm, rather than in, say, the financial sector where we would make twice as much, are motivated by interest in the products we work on. We generally look for jobs that are cool, where what we do is appreciated. I feel like equity is extremely important for this reason. As far as pay goes, and what constitutes the “market”, it’s also about who else is doing similar stuff or better, technologically. Businesses may appear very different in terms of the market for their product, but may be quite similar in the way the teams work together, the amount of managent oversight, and what an individual employee does on a daily basis.

It would be interesting to get your perspective ont he same topic but on mature companies like many of the 150 year old Telecom companies.

How are they to motivate and compensate their employees? They have a corporate structure opposiite to a startup and their motivation is to prevent startups from changing their existing and healthy revenue models. Innovation is not paramount, status quo is.

“It would be interesting to get your perspective ont he same topic but on mature companies like many of the 150 year old Telecom companies.”

Indeed because many of these companies also focus on cost cutting which means they avoid spending on their employees wherever possible. Training is hard to get, books, furniture, new kit etc. They also apply the same approach to pay itself and bonuses. In addition they often expect free hours from their employees.

And in the UK at least, pensions are pointless and the business solution to this is for employees to work more years.

“It would be interesting to get your perspective ont he same topic but on mature companies like many of the 150 year old Telecom companies.”

I spent two years researching individual initiative for my book on driving more follow through at every level of a company.

I found common answers for companies old or new economy. The biggest lesson is to focus on cutting the things that kill your team’s initiative just as ruthlessly as you cut costs. Some of those things are so simple people laugh but they are hard enough to cut to create a definate competitive advantage in long standing businesses like hospitals and manufacturing.

I’m not sure how I found your blog but it’s great. I think it’s very well thought out and has intelligent posts. I read “Good to Great” last year which was excellent. When I work with business it’s often difficult to get clients to focus on the importance of people in the organization (especially when they are tech/engineer type people). Jim Collins hits the importance of people home in his second charactristic of “Good to Great” companies which is “First Who, then What”. He makes the point that these people have to be “on the bus”, which I think is what your getting at. As a young guy though I think I still have a lot to learn about the importance of people.

I especially like the paragraph beginning with “Finally and most importantly”. This is a well written post. Thanks.

I’d like to add that some fast growing private companies have prioritized “hiring for values, and training for skills”. It’s a useful rule if you’re interested in preserving a culture of excellence, learning, and empowerment.

I especially like the paragraph beginning with “Finally and most importantly”. This is a well written post. Thanks.

I’d like to add that some fast growing private companies have prioritized “hiring for values, and training for skills”. It’s a useful rule if you’re interested in preserving a culture of excellence, learning, and empowerment.

Good post. I think being rigorous about recruiting and rewarding only the best people is a very hard lesson for entrepreneurs to learn.

By nature entrepreneurs believe in their own ability to carry out most tasks in an early stage company. They therefore tend to believe that most early employees will be able to to the same.

I have had to learn the hard way to resist appointing the first person to walk through the door and take my time to get the right person on board. When everyone in a start-up is working 24 hours a day, its hard to be disciplined and recruit well.

I also liked your comments on A players attracting A players. I have certainly seen this make a huge difference in the success of a venture. However, there is a role for B and C players as well – Harvard Business Review did a piece on this, but I couldn’t find the link to it.

Thank you for posting a concise overview of employee compensation strategies. I support the content of the post from a corporate financial health perspective. However, remembering Maslow’s Hierarchy of Needs, we may find that employess compensated fairly for their responsibilities and skills and who are comfortable with their financial situation may require a third aspect of reward in order to remain with a firm. This third aspect is briefly touched upon in the paragraph in which “A” players are discussed. Yes, A players enjoy working with A players. It’s a real incentive for attracting and keeping critical mass of brilliance within an organization. There are also other third aspects which may not often be discussed but are seen over and over again, especially at older telecoms or similar firms. This third aspect includes job attributes which are not sexy. For example: lenght of commute, flexibility in work hours, 401(k) match, access to interesting technology, age (employees in their mid-late 40’s and early 50’s), comfort with the role the employee is asked to play…etc. . . Over an employee,s working life span alternatives for increases in compensation, responsibility, and creativity can become extremely limited forcing the employee to derive satisfaction from the third aspect.

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Ed Sim is founder of BOLDstart Ventures and co-founder of Dawntreader Ventures. Mr. Sim has over 18 years of venture capital experience having led seed and first round investments in a number of high profile Internet and software companies.